The Index of Industrial Production (IIP) stood at 13.5% year-on-year (y-o-y) in March—growing lower than expectations—but, holding onto momentum. The number comes in against a growth of around 15.1% in the previous month and approximately 0.3% a year ago.
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Growth in March, however, pulls up FY10 growth further to a robust 10.4% y-o-y (against approximately 2.8% in FY09); most of the growth being led primarily by strong movement in consumer durables, capital goods and intermediate goods.
During the year, IIP posted a pronounced broad-based turnaround on the back of timely stimulus injection, credit availability, prevalence of soft interest rates and overall low rate of headline inflation. In addition, with lead indicators, including India Purchasing Managers’ Index (PMI), intermediate goods production and commercial vehicles production posting strong growth, concerns around a slowdown in momentum have been put to rest.
The strong double-digit growth has, to a great extent, been a derivative of a low base. Much of this low base effect is expected to wear off June onwards and the headline number is, therefore, likely to somewhat moderate, although basic momentum in IIP is set to continue. On balance, we expect the y-o-y IIP growth to be at similar levels for the next two months. However, the headline number is likely to settle in high single digits from June onwards.
With the economy gradually returning to normal, credit growth has started picking up despite policymakers reversing some of the stimulus measures. Lately, the Reserve Bank of India (RBI) is turning increasingly vigilant, bringing in regular doses of moderate rate hikes to pre-empt inflationary pressures (both commodity prices and asset prices). However, with IIP entering the consolidation zone and a likely softening in headline inflation from the March peak, pressure on RBI will reduce a tad for any quick or large dose of tightening. Tightening in policy interest rates likely to continue in “baby steps” ensuring no negative effect on domestic liquidity, credit offtake and growth recovery in general.
As per use-based classification, consumer goods production was the strongest during the month, followed by capital goods (which, after growing at an average of approximately 46% for the past three months, reflected some moderation). During March, growth in intermediate goods was lower than the preceding months. This segment, which maps the shape of a production cycle, typically tends to exhibit a two to four months lead period over the overall IIP. On the other hand, consumer non-durables production remained slack as a result of high consumer price inflation. In some of the segments, such as capital goods, consumer durables, growth was strong in January and February. A part of that surge had perhaps emanated from a front-loading of demand due to widespread fear of increase in excise rates, customs duties and interest rates March onwards.
On the whole, during FY10, the index was strongly supported by robust growth in intermediate goods, capital goods and consumer durables, while the major concern was driven by poor growth in non-durables which carries a weight of around 23% in the index. The non-durables index, which largely tracks production of agricultural and dairy products, tends to be negatively correlated with inflation, especially Consumer Price Index that assigns a higher weightage to food prices. Accordingly, with the recent surge in consumer prices, the non-durable segment has suffered.
As per classification by economic activity, growth in the manufacturing sector for March was somewhat lower than the previous month, primarily brought down by y-o-y deceleration in production of cotton textiles, machinery and equipment, and transport equipment. Mining and electricity production continued to boast robust numbers at around 11% and 7.7% y-o-y, respectively.
Manufacturing, with a weightage of around 80% in the index, grew around 11% in FY10 against approximately 3% the previous year. While a low base had a role to play in these high growth numbers, much of the push emanated from actual momentum in the economy. During FY10, sub-sectors such as chemicals, metals, machinery, rubber products, transport equipment, and chemicals led a rapid growth, while food products being the laggard. For the month under review, approximately 80% of the sub-sectors posted positive year-on-year growth against approximately 53% in March 2009.
Graphic by Yogesh Kumar/Mint